A Baltimore federal court judge ordered six absent defendants yesterday - including one from Maryland - to shut down Internet businesses that the Federal Trade Commission claims are part of a vast $100 million "scareware" scheme that tricked more than a million people into purchasing useless security software by making them think their computers were under attack.
"The evidence in this case is quite overwhelming," said U.S. District Judge Richard D. Bennett.
He also extended a freeze on the defendants' assets and signed an order requiring them to show why they shouldn't be held in contempt of court for missing the hearing and ignoring an earlier restraining order.
Bennett promised he would issue arrest warrants within five days if this round of orders in the civil case is ignored.
"People are hiding out," he said. "The time for hiding out will be over as of 4 o'clock next Wednesday."
Internet fraud is top concern for the FTC, which fields thousands of complaints each year about activity such as online identity theft and spyware. Fraud leeches millions of dollars from consumers and makes them afraid to go online.
Scareware, a relatively new hazard, is particularly devious because its sole purpose is to intimidate computer users through fear. Microsoft Corp. took a stand against it this fall, joining with the Washington state attorney general to file lawsuits against scareware purveyors.
It's "a considerable threat," FTC attorney Ethan Arenson said in court yesterday. His agency filed the suit last week, though Arenson said the FBI is also looking into the case, which means criminal charges could follow.
Court papers filed by the FTC outline a sophisticated scheme involving executives, past and present, with Belize-based Innovative Marketing Inc., or IMI - which also operates through a "variety of aliases and shell companies," Bennett said - and an Ohio affiliate known as ByteHosting Internet Services.
Neither the companies nor the defendants could be reached for comment, and they weren't officially represented in court yesterday.
The companies allegedly represented themselves falsely as Internet marketers and used legitimate advertising outlets to place malicious advertisements that redirected consumers to the defendants' Web sites.
There, screens would pop up saying a security scan had revealed harmful or illegal files and urging computer users to purchase software for $40 to fix the phony problems. In that way, the companies were able to bilk people of more than $100 million, according to the FTC.
In addition to the two businesses, the FTC named as defendants: IMI's chief technology officer, Daniel Sundin of London; IMI's chief executive officer, Sam Jain of California; former IMI executive Marc D'Souza of Canada; IMI's vice president of business development, Kristy Ross of Walkersville, Frederick County; and ByteHosting's owner, James Reno of Ohio.
The sixth defendant is Marc D'Souza's father, Maurice; the FTC believes he might have received illegal revenue from the scheme.
Marc D'Souza has also been sued in Canada by his one-time colleagues, who allege he embezzled $48 million from IMI.
None of the defendants appeared in court yesterday, nor did they respond to last week's temporary restraining order from another federal court judge. That order froze the defendants' assets in an attempt to make sure they're available should the court order restitution.
"There is good cause to believe that Defendants will continue to engage in attempts to conceal the scope of their unlawful actions to avoid returning their ill-gotten gains to consumers by their unlawful practices if not restrained from doing so," Chief Judge Benson E. Legg wrote.
Part of the problem, Washington, D.C., attorney Robert Luskin said in a telephone interview, is that with their assets frozen, the defendants can't spend any money.
"It's a catch-22. If [Jain] flew to Baltimore to appear and paid cash or with a credit card, he'd be violating the order," said Luskin, who is considering representing Jain if his cash is freed up.
Baltimore attorney William Alden McDaniel Jr. appeared in court as a courtesy to a colleague who represents Reno in another case. He was there, he said, simply to tell the judge that Reno couldn't appear because his funds are frozen.
"He can't even buy milk," McDaniel said in an interview.
Bennett was unmoved. "I understand," the judge said. "The defendants are too culpable to come here to the courtroom."
Attorneys listed in court document footnotes did not return calls for the other defendants.
The FTC asked for the orders shutting the businesses and freezing assets without notifying the defendants, who they believed would go into hiding.
Arenson said that the evidence required to receive such an order is extraordinary and the fact that it was granted underscores the serious nature of the case.
The FTC, which has received more than 1,000 complaints about the defendants' products, submitted five volumes of data supporting its claims.
Among those who consider themselves victims of the companies is Maryland attorney Stephen R. Layton, who submitted a statement to the court.
He said he uses a computer operating WindowsXP for business and was online about seven months ago when an alert popped up offering anti-virus software.
He clicked the "x" to close the box, which launched another alert that said he had thousands of viruses on his computer.
He was then directed to a Web site that said he could buy security software to fix his computer. The alert stayed there even after he shut down his machine, and a program appended virus messages to all of his files.
Layton said the defendants' programs essentially took over his computer and caused the loss of photos, documents and other files.
He replaced the desktop.
"This is a very serious matter," Judge Bennett said.